Ten 401k Moves to Make by New Year’s Day

I love this time of year.

It’s good that I’m not diabetic because my consumption of candy canes, gingerbread cookies, hot chocolate and virtually anything else you can think of that’s loaded with processed sugar goes through the roof.

But between shopping and Christmas parties, we still have to squeeze in a little time for end-of-year portfolio housekeeping. Because, let’s face it, life isn’t exactly going to slow down once we hit the first of the year.

It’s particularly important to take a good look at your 401(k) plan this time of year.

For the vast majority of Americans, the humble 401(k) remains the single most important piece of their retirement plan. And because they’re for long-term investments, moves you make today will have compounding effects for potentially the next 30 to 40 years.

So, with no further ado, let’s go through a quick to-do list of moves you need to make in your 401(k) plan before the end of the year.

1. Try to hit $18,500 if at all possible

This is it. You likely have only one paycheck left before the end of the year, or maybe two if you’re lucky. So, if you’re wanting to get the maximum tax break for this year, you have to act now. You can contribute to an IRA or to an Individual 401(k) up until the April 15 tax filing deadline, but regular corporate 401(k) contributions have to be made by December 31.

So, if you haven’t contributed the full $18,500 this year (or $24,500 if you’re 50 or older), this is your last chance to do it. Talk to your company HR department now and ask them to put 100% of your next paycheck into your 401(k) plan, if that is feasible for you. Every nickel you get into the plan is a nickel that is safe from the tax man, potentially for decades.

2. Revise your allocation

Market technicians may quibble on the details, but the bull market that started in 2009 is considered by many to be the longest in history. If you don’t look at your allocation all that often, you should give it a look.

After nearly a decade of stock market gains, it’s possible that you have a lot more exposure to stocks than you want or need. Take this time to rebalance your portfolio to an allocation that is appropriate for you at this age and stage of life.

In my Peak Income newsletter, I’m currently recommending that most readers keep no more than 50% of their account in stocks. To find out more about my income-generating service and get more 401(k) tips,

3. Take a good, hard look at your target date funds

Along the same lines, if your 401(k) plan is invested in a target-date fund, take a moment to look under the hood and see what it actually owns. You might think you’re invested in something appropriate for your age, but that’s not necessarily the case. Your target date fund might have much higher (or lower) exposure to stocks than you want. One fund company’s definition of an appropriate portfolio for a person retiring in 2020 might be very different than another fund company’s definition… or yours!

Checking the allocation might involve a little homework, but it’s generally something that you can do with about 10 minutes of digging around on Google. Look up the fund on the internet, and the management company’s website should give you a good idea of what it owns. There’s not necessarily a right or wrong answer. It’s just an issue of making sure the allocation you have the one you actually want.

4. Bump your contributions higher for 2019

With a new year comes a new opportunity to stick it to the tax man. In 2019, the maximum you can contribute (not including employer matching) increases from $18,500 to $19,000. And if you’re 50 or older, it gets bumped from $24,500 to $25,000.

$19,000 is a lot of money, of course. It amounts to almost $1,600 per month. But I’m betting that if you make it a priority, you can make it happen. And when you see the reduction in your tax bill, you’ll be glad you did.

5. Roll over any older employer plans

If you’re like most Americans, your retirement plans are probably a disorganized mess. In addition to your current employer’s plan, you might a half dozen older plans from previous jobs.

The more plans you have, the harder it is to keep track of them all. Do yourself a favor and consolidate them. I will likely take no more than 10 minutes on the phone with your old employer’s 401(k) administrator to make it happen. This isn’t something you necessarily have to do by year end, but if you’re already doing a little portfolio housekeeping, why not do it?

The fewer plans you have to keep track of, the less likely you are to get overwhelmed and neglect them altogether. So make this a priority.

6. Revise your beneficiary designations

I’ve been married for 10 years and have two children. Yet I discovered in horror two years ago that I still had my sister listed as my primary beneficiary on one of my larger retirement accounts. Had I gotten hit by a bus, that would have been a very awkward mess for my poor wife and sister to sort out.

So, be smart and check your 401(k) beneficiary designations, particularly if you’ve had any major changes such as a marriage, birth of a child or a divorce. You really don’t want your ex-wife to inherit your life savings rather than your children or current spouse.

7. Don’t forget contingent beneficiaries

Along the same lines, don’t forget to specify a contingent beneficiary. If you were to go down in a fiery plane crash along with your primary beneficiary (likely your spouse), you’d want to make sure the funds transferred to the next in line, which would generally be your children.

If you have no living beneficiary on record, your 401(k) plan will get dumped into your estate, where it will have to go through probate. Having a proper beneficiary on file bypasses probate and gets the funds to your heirs faster. So, do them a favor and make your contingent beneficiary designations are in order.

8. Consider a reverse rollover… maybe

As a general rule, I prefer Rollover IRAs to 401(k) plans because you have more investment options and, often, lower costs. But there is one major exception where it absolutely makes more sense to keep your assets in an employer plan rather than an IRA.

Active 401(k) plans (a plan you are actively contributing to) are not subject to required minimum distributions (RMDs).

So, if you are 70 or older and still working and contributing to your company’s 401(k) plan, you can eliminate your RMDs on any outside IRAs by doing a “reverse rollover” and moving the funds to your 401(k) account.

This can be a little tricky, however, so if this sounds like something you’d like to do, I recommend you first have a chat with a good CPA.

9. Ask your employer about deferred comp plans

Let’s say that you’re a diligent saver and that you’re able to max out your 401(k) every year and still have ample savings left over.

You might be able to stuff some of those excess savings into a tax-deferred, non-qualified retirement plan called a deferred compensation or “deferred comp” plan.

This is exactly what it sounds like. In these plans, your employer sets aside part of your pay into a tax-deferred account that is similar in look and feel to a traditional 401(k) plan. These are particularly good options if you tend to get large bonuses. You may be able to dump all or part of that bonus into the deferred comp plan and supersize your retirement savings.

Not all companies offer deferred comp plans, and you should be aware that these plans do not have the same legal protections as 401(k) plans. If your employer were to go bankrupt, your deferred comp savings could go up in smoke.

But, if you’re looking for additional tax-free savings, a deferred comp plan might be a fantastic idea.

10. Keep perspective

Finally, don’t forget why you contribute to your 401(k) in the first place. We save money today so that our families have security when we’re too old to work.

So, take a moment to give thanks for your loved ones, and try to do something special for them not specifically related to money. Spend some time with them without the distraction of your smartphone, and really listen when they talk rather than just waiting for your turn to speak.

Ultimately, that’s going to make all of you a lot happier than a couple extra bucks in the retirement account.

A very merry Christmas to you all, and a happy new year!

This article first appeared on The Rich Investor.

THIS Is Why We Hedge

The Dow dropped more than 500 points on Monday… only to finish the day in positive territory.

Now, even a few months ago, a massive swing like that would have been news. It would have had investors swapping stories and likely high-fiving each other.

These days, it’s just par for the course.

In fact, Monday’s swing was comparatively minor. Last Thursday saw a 710-point intraday rally that left investors believing that maybe – just maybe – the worst was behind us. Of course, this was followed by a nasty 559-point drop on Friday.

Wild swings are the order of the day.

Whenever we see moves like these, investors are hardwired to look for an explanation. They want to know why the market cratered or why it blasted higher.

Was the arrest of a Chinese executive that signaled a worsening of the trade war that pulled the floor out from under the market? Or was it softer language from a Fed speech that lit the fuse for a rally?

Whenever I hear explanations like these on CNBC, I want to reach into the TV and condescendingly pat the anchor on the head like a child.

That’s simply not how markets work.

Stock prices work just like any other competitive auction. When there are more buyers than sellers, prices rise. When there are more sellers than buyers, prices fall.

For the past two months, there have been more sellers than buyers, which is why the general direction has been down. But beyond that, corrections and bear markets also tend to be a lot more volatile than healthy bull markets. Everything gets more extreme. Stocks fall harder on down days and shoot higher on up days, and intraday swings gets larger as well.

Some investors choose to simply buy and hold and ride out rough patches like these. Most corrections tend to be short and relative painless, after all, so why bother selling to try to avoid downside if you’re just as likely to instead miss the upside when the bull market resumes?

That sounds great, of course. But some of those relatively painless corrections end up sliding into full-blown bear markets like 2008 or 2000 to 2002.

Rather than ride it out and hope for the best, some investors prefer to dump everything and sit in cash until the coast is clear.

That sounds great too. The problem is knowing when to get back in. Excess conservatism can cause you to miss major rallies when corrections turn out to be a lot shallower than feared.

In my trading service Peak Profits, I split the difference. When my model flashes warning signs, I neither close my eyes and hope for the best nor pull the ripcord and eject.

Instead, I hedge. I reduce my usual position sizes in the value and momentum stocks I recommend by half. I then use the 50% of the portfolio that is free to take a short position in the S&P 500.

So, instead of running an aggressive long-only stock portfolio, I run a hedged, market-neutral portfolio. At this point, the market can go up down or sideways, and I’m prepared for it.

Let’s say the market tanks on me. No problem. My portfolio’s value and momentum stocks might take a hit, but any damage is offset by the returns I earn from the short position in the S&P 500.

Likewise, it’s perfectly fine if the market rallies. Sure, I’ll lose money on the short position in the S&P 500. But my value and momentum stocks should enjoy a nice bump.

The important thing is that I don’t have to guess the direction of the market.

I simply have to choose a portfolio of attractive value and momentum stocks that are poised to either gain more or lose less than the S&P 500. And once my model signals that the worst of the correction is over, it’s back to business as usual. I close out the short position and increase the position sizes in my value and momentum stocks to their regular levels.

Happy Guy Fawkes Day

Remember, remember the Fifth of November,
The Gunpowder Treason and Plot,
I know of no reason
Why the Gunpowder Treason
Should ever be forgot.
Guy Fawkes, Guy Fawkes, ’twas his intent

To blow up the King and Parli’ment.
Three-score barrels of powder below
To prove old England’s overthrow;

By God’s mercy he was catch’d
With a dark lantern and burning match.
Hulloa boys, Hulloa boys, let the bells ring.
Hulloa boys, hulloa boys, God save the King!
–Traditional English nursery rhyme

It doesn’t get a lot of press on this side of the Atlantic, but today, November 5, is Guy Fawkes Day.

This is the day the English remember one of their most notorious villains or one of their most celebrated heroes, depending on their mood, religion, ideological leaning, or perhaps how early they started drinking that day.

In the early hours of November 5, 1605, Fawkes was found hiding under the House of Lords with a cache of explosives large enough to level the entire building. It was his plan to take out the entire government — king, ministers, parliament and all — during the State Opening of Parliament. Now that’s one way to cut government waste!

Naturally, he was brutally tortured and executed. But he is remembered, in typically dry English humor, as the last man to enter Parliament with honest intentions.

Today, the English celebrate Guy Fawkes Night with fireworks displays and by burning effigies of Fawkes or other contemporary political figures, but it’s always a little ambiguous as to whether they’re celebrating the foiling of the gunpowder plot or the murderous spirit of rebellion behind it.

More than anything, it’s an excuse to get together with friends and light things on fire… something that every red-blooded American should appreciate.

While I was studying at the London School of Economics, I enthusiastically went native and burned a few effigies myself, though to save my life I couldn’t tell you who or what we were symbolically burning.

Coming back to the present, we have a midterm congressional election tomorrow in what is the most polarized political climate of my lifetime.

My normally quiet neighborhood in Dallas is absolutely inundated with campaign signs, which is something I’ve never seen before, even during presidential elections.

Lake Highlands has always been idyllic 1950s America, a place where parents push their kids on front-lawn tree swings and people consider it impolite to talk politics.

Well, that’s changed… and not for the better. Neighbors with opposing campaign signs now flash dirty looks at each other across their perfectly manicured lawns.

I hate that. And I blame both parties for letting it get to this point. We have a Republican president that behaves like an internet troll and Democratic congressional leaders that seem to think it’s acceptable to have angry mobs disrupt the dinners of their Republican counterparts in restaurants.

A pox on both of their houses. There is no civility, and it’s made life materially worse for all of us.

As tempting as it might be, I’m not going to recommend that you follow Guy Fawkes’ lead by blowing up Washington, D.C., and murdering the entire government. Though you’d be doing the world a favor, that’s the sort of thing that gets you locked up in Guantanamo for the rest of your life.

But I do have some suggestions for you.

To start, turn off your TV. If possible, use parental controls to block CNN, Fox News, MSNBC and any other news stations. The way I see it, the caustic political bile is more damaging to impressionable young minds than violent or pornographic movies. Save your children – and yourself!

You don’t actually learn anything from watching the news. It won’t make you smarter, as the format is far too superficial to be truly informative (if you want real information, read a book or watch a long documentary).

The news won’t make you richer either, as it is rarely actionable. The news is really just a respectable-looking form of entertainment. Except unlike actual entertainment, it’s not fun or relaxing. The time you waste watching the news is time you could better spend making money or enjoying proper leisure.

Perhaps even more importantly, step away from social media. Twitter and Facebook are probably more responsible for the breakdown in civility than the politicians and pundits that use them. They bring out the worst in all of us.

At the very least, you should mute anyone who expresses political views in their social media stream… even views you agree with. Reading other people’s political rants will not add a day to your life or a dollar to your wallet. It will just put you in a bad mood and may even damage otherwise decent friendships. You don’t need to that.

In a fit of disgust a few years ago, I deleted most of my social media accounts. You don’t have to be quite as extreme as me, of course, but you can at least delete the apps off of your phone. You can still access the accounts via your computer, but you won’t be impulsively checking your phone every 30 seconds like a heroin addict.

I also advocate what I call the golden rule of the social media age. Don’t tweet or post something that you wouldn’t have the balls to say to a person’s face. It is the height of cowardice to mouth off on social media while sitting on your couch in your underwear. It’s even worse if you do so with an anonymous account.

At the very least, use your real name and post a recent picture of yourself. If you don’t want your name or face associated with it, you probably shouldn’t be saying it.

And finally, drink beer.

I’m not joking. There is nothing more conducive to civilized living than sharing a six-pack with a neighbor. Just make sure you actually listen to them rather than simply waiting for your turn to talk. You may not agree with them on everything (or anything), but you might find you like them anyway.

That’s all for today. A very happy Guy Fawkes Day to all my libertarian, anarchist and other assorted ne’er-do-well friends out there. Have fun tonight. Just try to avoid burning the city down.



Will Value Investing Run Up Next?

I’m going to keep this short because I’m putting the finishing touches on my presentation for later this week at the Irrational Economic Summit in Austin.

Though I have no love for the University of Texas (the Longhorns humiliated my beloved TCU Horned Frogs in a 31-16 rout last month), I’m excited to be headed to Austin for the week. For good music, good food, and good times, you really can’t beat Austin.

If you’re attending the Summit, be prepared for authentic Texas blues, Texas barbecue and, most likely, a little Texas beer too. And be sure to look for me in the crowd.

I love chatting with my readers, and it’s a great opportunity to ask questions and spitball ideas. Just do me a favor and avoid any mention of college football. It’s just too painful to discuss this year.

The theme for the summit is disruption, and my presentation will be on “Securing a Stable Stream of Income Amidst the Chaos.”

I plan to cover three broad themes: My outlook for bonds, the coming rotation from growth stocks to value stocks and, naturally, my favorite sectors for the coming year.

I don’t want to spoil the presentation by telling you too much, but I’ll give you a sneak preview…

Sneak Preview

It’s no secret that value investing works. Countless studies (and real-world practitioners) have proven that a strategy of buying cheap stocks beats the market over time.

Dimensional Fund Advisors recently ran the numbers for the 90-year stretch of 1926 to 2016 and found that a disciplined large-cap value portfolio outperformed the S&P 500 by over 2% per year.

That 2% might not sound like much. But compounded over the length of the study, it made a huge difference. A dollar invested in the S&P 500 in 1926 would have grown to a little over $6,000 by 2016. That same dollar invested in the large-cap value portfolio would have grown to over $13,000.

That’s huge.


The problem with value investing is that it doesn’t outperform every year… or even every decade. There are long stretches where value gets its butt kicked.

Take a look at the chart below.

This divides the value of the Russell 1000 Value Index by the Russell 100 Growth Index.

When the line is rising, value stocks are outperforming growth stocks. When the line is falling, value stocks are underperforming growth stocks.

We’re Poised for a Comeback

Going back to the late 1970s, growth and value have each had three respective stretches of outperformance.

Value outperformed throughout the early to mid-1980s, though growth dominated in the late 1980s. Value enjoyed a nice comeback in the early 1990s… though when the dot-com boom really got underway in the mid-1990s, growth left value in the dust for several years.

Value enjoyed a massive run of outperformance from 2000 to 2007. These were some of the very best years in the careers of long-time value investors like Warren Buffett.

But for the past 10 years, growth has utterly crushed value.

I believe value is poised to make a major comeback. I won’t go into detail today, as I don’t want you skipping my presentation on Friday and hitting happy hour early.

But I believe the next five to 10 years could look a lot like the 2000 to 2008 period.

That’s bad news if you’re betting heavily on social media stocks. But it’s fantastic news if you’re a value or income investor like me.



The Cheapest Way to Own Real Estate Right Now

Most think of it as the “bull market in everything.” But the past decade has been anything but a bull market for my favorite sector.

In fact, prices today are sitting at 2006 levels… and this despite the most accommodative Federal Reserve policies in history over most of this period.

Prices started to sag in early 2007 and then rolled over and died over the next two years. The sector had several strong years of recovery, but prices today are no higher than they were in 2013 and are still a decent bit below their old 2006 peak.

If you’re a value investor like me, that’s the sort of thing that ought to get you excited. At a time when the major indexes are coming off of their best run since the go-go years of the 1990s, this is a sector that investors have mostly left for dead.

The story gets even more compelling when you consider the power of dividends.

When you include dividends paid, the returns look a lot better. My favorite asset class is up about 46% from its pre-crisis top and up 440% from its 2009 bottom.

So, lest there be any doubt, dividends matter. In this case, they make the difference between having losses over the past 12 years and having returns of nearly 50%.

I suppose it’s time to let the cat out of the bag.

My Favorite Sector Is…

My favorite sector is income-producing real estate.

Real estate stocks haven’t exactly been popular of late. The sector got its butt kicked during the 2008 meltdown, and investors have been reluctant to touch that hot stove again. This is particularly true given that the sector was popular with retirees who liked the stocks for their income potential.

It’s been a particularly rough ride since 2013. That year, Fed Chairman Ben Bernanke merely mentioned the possibility that he might scale back the Fed’s quantitative easing program, and that was enough to rattle the bond market and send high-yielding real estate shares sharply lower.

Two years later, Bernanke’s replacement, Janet Yellen, rattled the sector again when she hinted that rate hikes would be coming soon.

Real estate stocks had one last hurrah into mid-2016, but rising bond yield took the wind out of their sails. And the “volpocalypse” this past February slapped the sector around yet again.

Frankly, it’s been a miserable five years to be invested in real estate. But I believe conditions are finally right to see this sector outperform.

To start, real estate stocks are worth more dead than alive at current prices. Recent estimates by real estate consultancy Green Street Advisors shows real estate stocks selling at a 5% discount to the value of the actual property they own.

That should never happen.

Barring a financial panic that sees prices temporarily dip below fair value, real estate stocks should literally always trade at significant premiums to the value of the real estate they own.

Investors pay a premium for professional management and for the ease of buying and selling with a mouse click rather than with a room full of lawyers with contracts.

Yet for most of the past five years, real estate stocks have traded at a discount. That kind of pricing won’t last forever.

But the bigger short-term catalyst will be a moderation in the rise of bond yields we’ve seen recently.

Barring a major recession, I don’t necessarily see bond yields dropping all the way to new lows. But at the very least, I see yields leveling off around today’s levels and probably falling slightly.

Unlike bond coupon payments, which are fixed, rents from real estate tend to rise over time.

Rising rents translate into higher dividends for investors. So, even if we’re stuck with 10-year Treasuries yielding over 3%, owning real estate with yields of 5% to 8% and rising payouts makes all the sense in the world if you want to boost your income.

I think these bargains are so valuable right now, and can help contribute to your retirement so much, that I decided to put together my top five real estate investments in a new report, How to Pocket Thousands in Monthly Income From Real Estate.

I’ll be releasing it this week. Stay tuned to your inbox for details.